08ASTANA970, SCENESETTER FOR CODEL RAHALL’S MAY 25-27 VISIT TO

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UNCLAS SECTION 01 OF 03 ASTANA 000970
SENSITIVE
SIPDIS
H PLEASE PASS TO CODEL RAHALL
E.O. 12958: N/A
TAGS: PGOVPRELECONEPETOVIPOTRAKZ
SUBJECT: SCENESETTER FOR CODEL RAHALL'S MAY 25-27 VISIT TO
KAZAKHSTAN
-------
Summary
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¶1. (SBU) Summary: Your visit to Kazakhstan comes at a particularly
opportune time. With its thriving energy sector and recent
selection as 2010 chairman of the Organization for Security and
Cooperation in Europe (OSCE), Kazakhstan is showing increasing
confidence on the international stage. The country is rightly proud
of its achievements: a booming economy, rapidly expanding national
capital, and largely harmonious multi-ethnic society. Kazakhstan
has proven to be a reliable security partner and a steady influence
in a turbulent region. The pace of democratic reform, however, has
been slow, with political institutions, civil society, and the
independent media still underdeveloped. Our fundamental strategic
objective is a secure, democratic, and prosperous Kazakhstan that
embraces market competition and the rule of law; continues
partnering with us on the global threats of terrorism, WMD
proliferation, and narco-trafficking; and develops its energy
resources in a manner that bolsters global energy security. We
would welcome your assistance in underlining to your Kazakhstani
interlocutors the importance of maintaining a good investment
climate, diversifying energy transport routes, and following through
on the democratic reform commitments Kazakhstan made when selected
to be 2010 OSCE chair. End Summary.
--------------------------------------------- -----
Strong Growth, But Short- and Long-Term Challenges
--------------------------------------------- -----
¶2. (SBU) Kazakhstan is the region's economic powerhouse, with an
economy larger than that of all the other Central Asian states
combined. Economic growth averaged 9.2% a year during 2005-07, and
the percentage of the population living below the subsistence level
dropped from 28% in 2001 to under 10% at present. The energy sector
is the dominant earner, with oil exports accounting for roughly a
third of GDP. In the long term, Kazakhstan must focus on
diversifying its economy, building up non-extractive industries,
agriculture, and the service sector. In the short term, Kazakhstan
is facing duel challenges of rising inflation, propelled by soaring
international prices on food and agricultural commodities, and
reduced economic growth, a reflection of the domestic impact of the
global financial crisis -- which has caused a significant
contraction in Kazakhstan's construction and real estate sectors.
In April, the government imposed a temporary ban on the export of
wheat in order to ensure adequate domestic supply and to keep
domestic prices down on bread. (Note: Kazakhstan produces much more
wheat than it consumes. We thus expect the export ban to be lifted
once the next harvest comes in. End Note.) At the end of 2007, the
government announced a $4 billion assistance program for
construction and real estate.
------------------------
An Emerging Energy Power
------------------------
¶3. (SBU) Kazakhstan exported just over 60 million tons of crude oil
in 2007 and is expected to be one of the world's top ten oil
producers soon after 2015. The country also has significant natural
gas reserves -- 1.8 trillion cubic meters is a low-end estimate --
but for now, natural gas exports are relatively small, just 10.2
billion cubic meters in 2007, in part because gas is being
reinjected to maximize crude output. U.S. companies have
significant ownership stakes in Kazakhstan's three largest oil and
gas projects: Kashagan, Tengiz, and Karachaganak.
¶4. (SBU) Kashagan -- the largest oil field discovery since Alaska's
North Slope and perhaps the world's most technically complex oil
development project -- is expected to commence production in 2012.
In January, the Kazakhstani government and the Kashagan consortium's
international partners agreed on revised terms for the Kashagan
contract which resulted in a new operatorship model, financial
compensation to Kazakhstan for several years of production delays
and significant cost overruns, and an increased ownership stake and
management role for Kazakhstan's state oil and gas company,
KazMunaiGas (KMG). Kashagan's current equity stakeholders are as
follows: ExxonMobil (16.8%), Shell (16.8%), Total (16.8%), Eni
(16.8%), KMG (16.8%), ConocoPhilips (8.4%), and Inpex (7.6%).
¶5. (SBU) Tengiz -- with a 50% Chevron stake, 25% ExxonMobil, 20%
KMG, and 5% LukArco - is the world's deepest operating "super-giant"
oil field, with the top of the reservoir at about 12,000 feet deep.
Crude production at Tengiz is expected to increase later this year
from 400,000 barrels per day to 540,000, once the project's second
generation expansion comes on line. Karachaganak (with a 32.5% BP
Group stake, 32.5% Eni, 20% Chevron, and 15% Lukoil) is one of the
world's largest oil and gas condensate fields. Karachaganak
ASTAN
A 00000970 002 OF 003
produced 10.4 million tons of oil and 12 billion cubic meters of gas
in 2007.
¶6. (SBU) The Kazakhstanis recognize they do not have the capability
to exploit their oil and gas resources on their own, especially
given the complexity of Kazakhstan's oil and gas projects.
Kazakhstan thus continues to welcome foreign investment in energy
exploration and production, and both the Kazakhstani government and
the international companies are committed to an enduring
relationship. That said, Kazakhstan has grown increasingly
assertive in its energy sector in recent years, reexamining the
terms of existing contracts, driving a harder bargain with
prospective investors, and aggressively pursuing environmental and
tax claims against international oil companies. (For example, the
Tengiz consortium is currently fighting a $300 million environmental
fine for on-site storage of several million tons of sulfur. The
consortium received all the proper permits for sulfur production,
and maintains that no permits are necessary -- or available -- for
sulfur storage.) In October 2007, President Nazarbayev signed
legislation which gives the government the right to terminate a
subsoil use contact if it determines that a company's actions
violate Kazakhstan's national economic security interests.
Nazarbayev has stressed publicly that the legislation would be not
be applied retroactively, against contracts that already existed
when the legislation went into effect.
-------------------------
Bringing Energy to Market
-------------------------
¶7. (SBU) With major production increases on the horizon, Kazakhstan
must develop additional transport routes to bring its oil and gas to
market. Our policy is to encourage Kazakhstan to seek diverse
routes, which will ensure the country's independence from transport
monopolists. Currently, the bulk of Kazakhstan's crude oil is
exported via Russia, including through the Transneft system and the
independently-owned Caspian Pipeline Consortium (CPC) pipeline, in
which Chevron holds a 15% interest. Near-term crude production
increases are likely to flow by rail through Russia, by tanker
across the Caspian Sea to Baku, and through the CPC pipeline, should
an agreement be reached with Russia on CPC expansion. We believe
that a trans-Caspian oil pipeline must be built to handle later
production growth; however, Kazakhstan is reluctant to openly pursue
this option in the absence of an agreement on delimitation of the
Caspian Sea among the five Caspian littoral states. Moving
increased volumes of Kazakhstani oil from Baku onward is also a
challenge, and will likely require expansion of existing pipelines
or construction of new ones that run through Georgia, such as
Baku-Tbilisi-Ceyhan. Over 90% of Kazakhstan's limited gas exports
currently flow through Russia. Kazakhstan hopes to export 5 billion
cubic meters of gas annually to China by 2009.
---------------------------
Democratic Development Lags
---------------------------
¶8. (SBU) While the Kazakhstani government articulates a strategic
vision of democracy, it has lagged on the implementation front.
This in part reflects the political reality that President
Nazarbayev remains extraordinarily popular, while the opposition is
weak and fractured. It also is a result of the government's
resistance to fully competitive political processes. In May 2007,
significant amendments were adopted to Kazakhstan's constitution
which were touted as strengthening parliament, but also removed
terms limits on Nazarbayev. In parliamentary elections held in
August 2007, Nazarbayev's Nur Otan party received 88 percent of the
vote and took all the seats in parliament. The OSCE election
observation mission concluded that the elections did not meet OSCE
standards.
¶9. (SBU) While Kazakhstan's diverse print media includes a plethora
of opposition papers sharply critical of the government and of
Nazarbayev personally, the broadcast media is almost exclusively in
government hands and maintains a pro-government line. Several
opposition web-sites were temporarily shut down by the government in
late 2007 for uploading recordings of embarrassing conversations
between senior government officials that were apparently made by
Nazarbayev's former son-in-law, Rakhat Aliyev, who was recently
convicted in absentia of plotting to overthrow Nazarbayev. Since
mid-April, the Kazakh- and English-language websites of Radio Free
Europe/Radio Liberty (RFE/RL) have been inaccessible in Kazakhstan.
On May 20, RFE/RL issued a press release which maintained that the
Kazakhstani government likely blocked the sites deliberately. We
have raised the issue with senior Kazakhstani officials, but it
remains unresolved.
¶10. (SBU) When Kazakhstan was selected as 2010 OSCE chairman at the
ASTANA 00000970 003 OF 003
OSCE ministerial in Madrid in November 2007, Kazakhstan publicly
committed to undertake several democratic reforms: specifically,
that by the end of 2008, it would amend its election and media
legislation to better meet international standards and liberalize
registration procedures for political parties and media outlets.
Kazakhstan also promised to support the OSCE's "human dimension" and
preserve the mandate of the OSCE's Office of Democratic Institutions
and Human Rights (ODIHR), including its critical role in election
observation. The government has recently initiated working groups
with participation from the political opposition and NGOs to discuss
amendments to the election and media legislation. Ensuring that
Kazakhstan follows through on its so-called "Madrid commitments" is
one of our bilateral priorities for 2008.
--------------------
Iraq and Afghanistan
--------------------
¶11. (SBU) Kazakhstan is the sole Central Asian country participating
in Operation Iraqi Freedom (OIF). Since August 2003, the
Kazakhstanis have maintained a military engineering unit at FOB
Delta in Al-Kut (Wasit province) which has disposed of over 4.5
million pieces of unexploded ordnance. The unit also provides
training to Iraqis in ordnance destruction. Kazakhstan is an
important partner for Afghanistan's Operation Enduring Freedom
(OEF). To date, Kazakhstan has facilitated over 4000 cost-free
overflights for U.S. military aircraft supporting OEF. Kazakhstan
is also providing Afghanistan with $2.88 million in assistance in
2008, which is being used for food and seed aid and to construct a
hospital, school, and road. The Kazakhstanis are encouraging their
private sector to seek out investment opportunities in Afghanistan,
and have indicated that they want to make Afghanistan a focal point
for their OSCE chairmanship.
-----------------------------
Non-Proliferation Cooperation
-----------------------------
¶12. (SBU) Non-proliferation cooperation has been a hallmark of our
bilateral relatio
nship since Kazakhstan became independent and
agreed to give up the nuclear arsenal it inherited from the USSR.
Our bilateral Cooperative Threat Reduction (CTR) program has
facilitated the dismantlement of Kazakhstan's intercontinental
ballistic missile launchers, closure of test tunnels and boreholes
at the former Soviet nuclear test site in Semipalatinsk, and
elimination of an anthrax weapons production facility. Several
critical CTR programs are ongoing, including the effort to secure
and store spent fuel from a closed plutonium production reactor, as
well as a biological threat reduction program aimed at ensuring
effective Kazakhstani control of dangerous pathogens. In December
2007, the U.S. and Kazakhstan agreed to extend our bilateral
umbrella agreement for the CTR program for an additional seven
years. However, the Kazakhstanis still have to ratify the
extension. In the interim, we have faced difficulties in receiving
the tax and customs exemptions necessary for us to continue
uninterrupted implementation of the CTR program.
-------------------------------
Relations With Russia and China
-------------------------------
¶13. (SBU) The Kazakhstanis continue to deftly balance relations with
Russia, China, and the U.S., and view the U.S. as a critical
counterweight to their two very powerful neighbors. Social,
cultural, and personal links help provide Russia with unmatched
influence in Kazakhstan. Kazakhstan's population is approximately
one-third ethnic Russian, and Russian remains the dominant language
of the country. The most popular TV stations provide a heavy diet
of programming from Russia, and the most widely-read newspapers
cover events in Russia closely (and rarely unfavorably). Nazarbayev
and Putin met more than 15 times over the last two years. New
Russian President Medvedev is visiting Kazakhstan during May 22-23,
his first trip abroad as president -- a clear signal of the
importance Russia attaches to its relationship with Kazakhstan.
Relations with China have strengthened as fears of Chinese
encroachment have largely receded. Kazakhstan-China trade grew by
66% in 2007. China is also a major player in Kazakhstan's energy
sector. A Kazakhstan-China oil pipeline has an annual capacity of
ten million tons of crude, with capacity to double when its
expansion is completed.
ORDWAY

The information recorded on this site has been extracted from http://Wikileaks.org (Kazakhstan) database..

We wish to express our gratitude to Julian Assange and his team for making this data available as it is an important public record.

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